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Verizon Communications (NYSE: VZ) is a U.S. telecommunication company and provider of fixed-line, wireless, television, and data services. Its wireless division, Verizon Wireless, is a joint venture with Vodafone, representing 91.2 million customers as of the end of FY2009^[1]. After Verizon completed its $28.1 billion acquisition of Alltel in January 2009, Verizon Wireless became the largest wireless carrier in the United States.

To jumpstart its wireline business segment, which has experienced increased competition as customers switch to wireless products or less expensive alternatives such as VoIP technology, VZ has delved deeply into its Fiber-to-the-Home (FTTH) service, FiOS, and is looking to invest up to $23 billion by the end of 2010^[2]. FiOS provides advanced data, video, and telephony products, offering "triple play" services and utilizing a fiber optic transmission that allows for download speeds upwards of 50Mbps. As of the end of FY2009, Verizon boasted 3.4 million total FiOS Internet customers and 2.9 million total FiOS TV customers^[1].

Company Overview

Verizon Communications was formed in 2000 with the merger of Bell Atlantic and GTE Corp, and offers a wide array of wireline and wireless voice and data transmission services via approximately 41.4 million residential and commercial access lines throughout the United States.

Business and Financial Metrics

Verizon reported $108.2 billion in pro-forma total revenues (i.e. including Alltel's revenues) for FY2009, an 11.5% YoY increase^[1]. Within its wireless segment, the firm reported having 91.2 million total customers, the highest in the industry, over $50 in ARPUl a total post-paid churn rate of 1.44% (low by industry standards)^[1].

Business Segments

Verizon Wireless (57% of revenue in FY2009)

Verizon Wireless is the largest provider of wireless voice and data services in the United States^[4]. The business segment is a joint venture between Verizon and Vodafone; with Verizon holding a 55% stake in Verizon Wireless, and Vodafone holding the remaining 45%, it has controlling power over the company’s operations.^[5]. Its services include basic local and long distance wireless voice services, text messaging, music downloads, navigation and Internet access, V CAST Music and V CAST Mobile TV. The company has more than 25 multimedia phones that allow customers to browse and download songs, and the first true mobile TV service in the nation. (See 3G concept page for additional information on third-generation wireless technology.)

In January 2009, Verizon Wireless completed its $28.1 billion acquisition of Alltel Corporation, a regional wireless carrier, increasing its market share and becoming the largest U.S. wireless carrier by subscribers^[4]; as of the end of FY2009, the company boasts a customer network of more than 91 million customers^[1].

Wireline (43% of revenue in FY2009)

In 3Q09, Verizon's management team consolidated Verizon Telecom and Verizon Business to form a single Wireline segment that competes with cable operators in advanced data, video, and telephony products. Through this consolidation, Verizon is now the leading provider of Fiber-to-the-Home (FTTH) and boasts an ARPU of $135 per month^[6]. As of the end of FY20009, its FiOS service passed approximately 15.4 million homes and held 9.2 million broadband connections ^[1].

Trends and Forces

Maturing Market

Revenues from voice traffic for a wireless carrier are driven by its number of subscribers and the average revenue generated per customer (ARPU). While the wireless business has been the driver behind Verizon's recent revenue growth, this growth has decelerated as the U.S. market continues to mature, with U.S. wireless subscription penetration topping 89% as of June 2009^[8]. Total U.S. subscriber counts grew at an annual rate of 11% in the 2000's, compared to 33% in the 1990's^[9], an indication that there is very little room left for organic growth.

In an effort to compensate for the deceleration in growth, Verizon acquired Alltel for $28.1 billion. The merger was approved by the FCC and the Department of Justice in November 2008^[10]and completed in January 2009, adding 13 million new customers and ousting its competitor AT&T as the top player in the U.S. market^[11]. As part of the deal, Verizon will divest 105 markets worth between $3 billion and $4 billion to eliminate its overlapping network with Alltel^[12].

Verizon's announced partnership with TESSCO Technologies in September 2009 aims to take advantage of the nation's largest 3G wireless network and a comprehensive set of Machine-to-Machine (M2M) hardware solutions. This will benefit Verizon Wireless consumers by reducing their costs when purchasing from multiple vendors and maximizing efficiencies in remote monitoring^[13]. Additionally, a joint venture with Apple to launch an Internet security suite for Mac users subscribing to Verizon's internet services. With Mac users representing a growing segment of the broadband community, Verizon is looking to increase its triple service customer base by enhancing their online experience^[14].

Line Losses and VOIP Substitution

Wireline line losses at Verizon Communications happened consistently over the last years. Several factors have been driving this trend, including increased VOIP and wireless substitution as well as line losses to the cable companies that started to offer bundled wireline services themselves. An increase in line losses has less of a material effect on revenues and earnings at Verizon now than in the past. Wireline ARPU among remaining Verizon wireline customers rose 11 percent in 2007, due to customer usage of new wireline broadband and FiOS TV services. There could be some improvement in the rate of phone customer loss as the FiOS network upgrade progresses, but currently the services aren't available to a large enough number of customers to offset the inroads the cable firms are making in the phone business.

Long Term Evolution

Verizon's development of its 4G technology is currently underway as part of a project known as Long Term Evolution (LTE), which is a joint attempt to increase the capacity and speed of mobile telephone networks. Besides faster Internet access, LTE will enhance video quality,speed up Internet access, and allow for easier-to-use mobile applications. Ericsson and Alcatel-Lucent are the contractors in charge of developing Verizon's underlying network infrastructure, projected to launch in over 30 markets in 2010, covering more than 100 million people^[15][16].. Verizon has been using existing 700 MHz spectrum to field-test LTE networks across the country, and in August 2009 it completed its first successful LTE 4G data call^[16].

Regulatory Environment

The telecommunications industry is a heavily regulated market. In the U.S., communications services are subject to regulation at the federal level by the FCC and in certain states by public utilities commissions, or PUCs. With regards to wireless, the FCC regulates the licensing, construction, operation, acquisition and sale of all wireless operations and wireless spectrum holdings. With regards to wireline, The Telecommunications Act of 1996 was designed to promote competition and eliminate legal and regulatory barriers for entry into local and long distance communications markets. It also required companies to allow resale of specified local services at wholesale rates, negotiate interconnection agreements, provide nondiscriminatory access to unbundled network elements, and allow co-location of interconnection equipment by competitors. It speaks for itself that in such a heavily regulated market, any significant regulatory change could have a major impact on the company or industry as a whole.

In early July 2009, both the FCC and DOJ have been asked by Senator Herb Kohl of Wisconsin to investigate anti-competitive practices in the cell phone industry ^[17]. The concern is that 4 companies (AT&T, Sprint, T-Mobile USA, and Verizon) control 90% of the market. Kohl has expressed concern about price increases by the four main carriers for text messaging at the same time. Kohl would also like to see better rates for roaming, a stop to exclusive deals with handset manufacturers, and acceptable rates in the so-called "special access" market where wireless companies pay other carriers to connect to central phone and Internet arteries. Senior officials across the telecom industry have responded to Senator Kohl's concerns by saying that 95% of the consumers in the U.S. can choose between at least three different wireless providers, thus not violating competitive practices.

Competitors

Both of Verizon Communications’ business segments are competitive players in the telecommunications industry. Its wireless business, which boasts the largest subscriber bae, competes with other U.S. wireless carriers, including AT&T, Sprint, and T-Mobile.Verizon Wireless Its wireline business, which constantly faces challenges from new and potentially disruptive technologies, include non-wireline telecommunications providers such as VoIP, high-speed internet companies, and cable companies such as Time Warner Cable and Cablevision Systems (CVC).

References

1. ↑ ^{1.0 1.1 1.2 1.3 1.4 1.5} Verizon Communications, FY2009 10-K 01/26/10
2. ↑ Analyzing Verizon's FiOS Bet. Seeking Alpha (August 19, 2008).
3. ↑ "AT&T," Morningstar Investment Research
4. ↑ ^{4.0 4.1} Verizon Wireless Completes $28.1B Alltel Buy, January 9, 2009
5. ↑ Verizon Communications 2007 10-K, Pg. 7
6. ↑
7. ↑ ^{7.0 7.1}
8. ↑ [1]
9. ↑ "CTIA’s Semi-Annual Wireless Industry Survey" CTIA
10. ↑
11. ↑
12. ↑
13. ↑ "TESSCO Technologies and Verizon Wireless to Jointly Market Wireless Products and Solutions" Business Wire, Sept. 28, 2009
14. ↑ "Verizon Out in Front of Cable Again With Launch of Internet Security Suite for Mac" PR Newswire 9/28/09
15. ↑ "Verizon Preps for Long Term Evolution Leap," TechNewsWorld, 02/18/09
16. ↑ ^{16.0 16.1} "Verizon Wireless Completes Successful LTE 4G Data Calls In Boston And Seattle," 08/14/09
17. ↑ Fawn Johnson (July 8, 2009). AT&T Disputes Antitrust Allegations Against Cell Phone Cos. Dow Jones.